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Appeals Court: Debtors must be income eligible to convert from Ch. 13 to Ch. 7

When a federal appeals court recently ruled that Chapter 13 debtors must meet the income eligibility requirements of section 707(b) before their case be converted to a Chapter 7, it joined an increasing chorus of cases with similar holdings. However, the court left an important question unanswered: Which six months of look-back income will the Court require for the purposes of calculating the debtor’s Means Test?

In the consolidated appeal of two Iowa and Minnesota cases, In re Chapman and In re Cruse, Nos. 10-6046 and 10-6047 (8th Cir. BAP Mar. 11, 2011), the debtors had filed a Chapter 13 after the 2005 Bankruptcy Reform Act was enacted. However, a change of circumstances, they converted their chapter 13 cases to chapter 7s, requesting a discharge of their debts prior to the completion of their respective chapter 13 plans. The U.S. Trustee objected, arguing that based on the income they claimed to earn in their chapter 13 plans, they could afford to repay at least part of their debts.  The debtors countered that section 707(b) of the U.S. Bankruptcy Code governing the Means Test only applied when debtors initiated their cases as chapter 7s, not when cases were converted to chapter 7s from chapter 13 filings. Further, they contended that since their changed circumstances inhibited their ability to continue paying into their chapter 13 plans, they should not be subject to the Means Test.  The bankruptcy courts agreed with the debtors, ruling that section 707(b) only applied to cases originally filed as chapter 7s, not conversions. The U.S. Trustee appealed, and the bankruptcy appellate panel ordered the two cases consolidated for the appeal.  In ruling against the debtors, the appeals court held that under long-standing Eighth Circuit federal appeals court precedent, the term “conversion to chapter 7” is synonymous with “filed under chapter 7.” However, since the appeals court did not address the income look-back requirement of section 707(b), future litigation on the matter is likely.

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